Domestic Demand is Key to Sustaining Growth in China Amid High Uncertainty: World Bank Report | WPN World People News

China’s economic growth has so far remained resilient in the face of high global uncertainty. GDP growth was 6.4 percent year on year in the fourth quarter of 2018 and in the first quarter of 2019, compared to 6.8 percent in the first half of 2018. Growth is projected at 6.2 percent for 2019 and 6.1 percent for 2020.

In an external environment that has become less favorable due to slowing global growth and rising trade tensions, China’s economy will need to rely increasingly on domestic demand to sustain rapid growth, according to Managing Higher Uncertainty, the May 2019 edition of the World Bank’s China Economic Update released on May 31.

“In response to the growth moderation and less favorable external conditions, the government introduced a fiscal stimulus emphasizing tax incentives,” said Martin Raiser, World Bank Country Director for China. “While the central government has fiscal space to further increase spending, if necessary, the additional stimulus should be appropriately funded either directly at the central level or through additional fiscal transfers to the provinces. Higher spending on health, education, and social protection could help boost demand and improve the quality of services, if combined with reforms to increase efficiency.”

Renewed trade tensions contributed to rising financial market volatility in early May. Financial asset prices dropped sharply in response to the US announcement of higher tariffs on imports from China. Amid higher market volatility, the People’s Bank of China has maintained a prudent overall monetary policy stance with some targeted easing. Higher bank loans and corporate and government bond issuance led to slightly stronger growth in credit to the non-financial sector in the first four months of 2019.

In 2018, lower value-added tax (VAT) rates and import duties, higher export VAT refunds, and slower growth in personal income taxes contributed to a consolidated fiscal deficit of 3.9 percent of GDP. In 2019, new tax and fee reductions and a higher limit for local government on-budget borrowing may lead to a higher consolidated deficit of about 5.9 percent of GDP.

Taking into account the expected stimulus, the World Bank baseline projection for GDP growth in 2019 remains unchanged at 6.2 percent. Despite the positive surprise in GDP growth in the first quarter of 2019, net exports are unlikely to provide a sustained boost in the coming months, as new tariffs take effect and global growth slows. The escalation in trade tensions, weaker business confidence, and slower global trade growth, are expected to weigh on investment and exports in 2020, prompting a downward revision to next year’s growth forecast.

“Despite being among the global leaders in a number of technologies, China still has significant room for catching up to the aggregate productivity level of high-income countries and can continue to benefit from global integration," said John Litwack, World Bank Lead Economist for China. “Economic prospects both in China and in its trading partners would receive a significant boost from resolving the current trade disputes.”

Source: World Bank